Microsoft and Nortel's 'unified' approach

Firms to develop software for business communications

WASHINGTON (MarketWatch) -- Microsoft Corp. and Nortel Networks Inc. said Tuesday that they plan to collaborate on developing software that makes it easier for companies, employees and customers to communicate with each other.

The U.S. software giant and the Canadian network vendor aim to create software-based technology that allows people to use one device to access all their phone calls, email, voice mail or instant messages -- whether in the office, at home or on the road.

Even though Nortel
NT
and Microsoft
MSFT, -3.39%
do not have many products available yet, executives boldly predict that they'll start to generate significant revenue from the sale of unified-communications technology within a few years.

Jeff Raikes, president of Microsoft's business division, said that the fledging global market for so-called unified communications could eventually reach as high as $40 billion.

Nortel Chief Executive Mike Zafirovski, the former Motorola Inc. executive hired last year, was just as bullish. He predicted the partnership with Microsoft could generate "well beyond $1 billion in new revenue" for Nortel, though most of the gains would not come until after 2009.

Ballmer and Zafirovski demonstrated the seriousness of their approach by elaborating on their partnership in a joint press conference. Typically, partnership deals rarely get such high-profile treatment, especially for a market that barely exists.

While industry analysts agree that companies will eventually adopt new software-based messaging technologies, they are more cautious about the size of the potential market.

Norm Bogen of In-Stat, for instance, said the total messaging market, including plain-vanilla voicemail, totaled about $1 billion in 2005. He expects the number to stay about the same over the next five years. Companies will replace older hardware with newer software, but probably won't spend much more than they do now, he said.

"Forty billion dollars sounds awfully large," Bogen said.

The idea of unified communications has been a hot topic in the high-tech industry for years, but most companies have been slow to develop or announcement specific policies to address the newly emerging market. International Business Machines Corp. and Cisco Systems Inc. are among the few to announce their own strategies.

The idea of unified communications has been a hot topic in the high-tech industry for years, but most companies have been slow to develop or announcement specific policies to address the newly emerging market.

It's far from clear, however, whether businesses are prepared to spend billions of dollars on new software, devices and services capable of delivering unified communications. Microsoft and Nortel executives say that the potential savings and ease of use will entice companies to upgrade their communications services.

The same arguments were made on behalf of Internet telephony several years ago, but that market hasn't grown as fast as expected. Companies are reluctant to replace older, but still useful, communications equipment in one swoop. Many are upgrading gradually, grafting new technologies onto older ones.

Still, the partnership with Microsoft represents a small coup for Zafirovski. The deal could give the much-smaller Nortel a shot in the arm and is part of Zafirovski's multipronged approach to revive the struggling networker. Nortel has faltered badly in the wake of the high-tech bust in 2001 and a major accounting scandal in 2004.

The collaboration with Nortel, meanwhile, builds on Microsoft's strategy of trying to replace traditional phone systems with more flexible and cheaper Internet-based technologies that play into its strength as a software developer.

Last month, Microsoft unveiled plans to make a broad push into the business-telephone market, including the development of desktop phones and videoconferencing devices.

Ballmer reiterated his belief that the unified-communications market is ready to take off. "The opportunity for our customers is fantastic," he said. "We will enable them to realize tremendous economic and business benefits from unified communications."

Under the four-year partnership, the two companies will collaborate in a wide range of areas and cross-license technology. Nortel will even send some personnel to Microsoft's home base in Redmond, Wash., to work with the software company's developers.

"Whether or not Nortel can make the Microsoft relationship work, it shows the new outsiders at Nortel are making the company think differently and view emerging market opportunities and evolving value chains from a different perspective," said Bill Leisur, director of Technology Business Research, an industry advisory firm.

In recent trades, shares of Nortel jumped as much as 6%, while Microsoft stock was up slightly.

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